Sophisticated investors are betting on contract tech. It’s about business, not the intricacies or importance of law.
Today’s post (256) and last week’s (255) are a two-part series on the burgeoning legal tech sector.
Whereas Post 255 focused on the explosion in the legal technology market over the past year—five new #Legaltech Unicorns, three companies go public—this post looks contract tech, which is arguably legal tech’s hottest subsector.
According to data from Raymond James, $1.4B was invested in legal technology companies during the first half of 2021. See Richard Tromans, “Legal Tech Funding Hits $1.4BN, While M&A Soars (Updated),” Artificial Lawyer, Aug 2, 2021 (discussing and analyzing data). Of the 103 funding rounds that make up this figure, nearly a quarter (22%) went to just six contract companies: Icertis ($80M), Ironclad ($100M), Evisort ($35M), Dealhub ($20M), Contractbook ($30M). and Linksquares ($40M). As Jae Um recently observed, “KTech is the space to watch.” Post 220; see also Post 228 (Bill Mooz and Paula Doyle discussing how poor contracting processes and practices cost businesses $2.5 trillion per annum)
While some of the early adopters of contract tech over the past ten years were law firms and alternative legal service providers, the focus has shifted now to the businesses themselves. Contracts are obviously central to legal, but every part of the business benefits from better contract management. As a result, contract tech is seeing investment from the top VC and PE firms, legal technology incumbents as well as some of the biggest tech companies on the planet.
What makes contracts so intriguing, then, is the fact that everyone else cares.
Navigating a complex market
Conceptually, the contract tech market is both dynamic and fascinating. It features a variety of companies with differentiated go-to-market strategies and development roadmaps all gunning for the same prize: to disrupt the way that companies handle their contracts.
New competitors are constantly emerging. In a soon-to-be-published interview, Onit CEO Eric Elfman said they have identified 130 companies in this space. And, as the above lead image shows, the multiple adjacent spaces to contracts will mean an entire variety of strategic acquirers both in and outside legal.
The technology is getting better as is the service delivery.
In a 2021 interview, VP of Law and Technology at NetApp Connie Brenton relayed that, “When we implemented our first AI technology, we thought it was going to take 200 agreements, but it ended up taking 2000 agreements to get the machine trained. Now, we can train on as few as 20 to 30 and with pretty good accuracy.” Webinar, The Past, Present, and Future of Legal Operations, Axiom, May 27, 2021. One of the founders of a successful first-generation contract AI startup told us that, “Today, starting from scratch, we could rebuild our solution in weeks.” Cf. Vishal Sunak, “
Despite the growth of this vertical, the failure rate of contract technology implementations has been very high. It is hard to read Gartner’s stat that more than 50% of general counsels say that transformation projects have failed to meet expectations and not think that most of those transformation projects were probably related to contracts. Press Release, “Gartner Says More Than Half of Legal Transformation Projects Underperform Expectations,” Jan 21, 2021; see also Frank Ready, “In House Legal Teams are Stumbling in Executing Their Tech Roadmaps,” Corporate Counsel, Aug 5, 2021. The percentage of companies using contract technology in the CLOC State of the Industry report decreased by 9% between 2019 and 2020. See CLOC, “2020 State of the Industry Survey Report,” Aug 2020. We have spoken to numerous departments who are ripping out a system they put in five years ago and are not sure if they are even going to replace it.
It is precisely because there are so many players and interested parties, and because the technology is always improving, the contract market can be difficult to navigate. This essay aims to demystify the contract tech market.
Defining terms: contract lifecycle management
Understanding the contract tech market requires defining a term that, until now, has been subjective: contract lifecycle management or CLM.
CLM will sometimes refer to a tool that makes it easy to assemble contracts, while others will use the term CLM when referring to machine learning (ML) that can read a contract and identify key clauses; we have even heard point solutions referred to as CLM.
We propose the following definition: contract lifecycle management is not a technology or a tool but, instead, a process inside an organization that begins with a request to either draft a contract or review a third party agreement and then ends with termination or renewal.
Every company in the world that executes contracts with clients or suppliers undergoes CLM, with varying levels of complexity. Per the graphic below, we think it is helpful to think about four stages in the CLM: pre-execution drafting of an agreement, pre-execution review of a third party agreement or third party’s markup, execution of the agreement, and then analysis of the executed agreement.
There are ways of improving contract lifecycle management in terms of speed, cost, and risk mitigation in each of these four stages through better policy, design, and technology. Very often the new tech, policy, or design will remove attorneys from the equation. But, since the required functions in each of these stages are different, the technologies to improve those stages are also entirely different—e.g. drafting is different from reviewing.
Integrating a broad range of technologies
According to KP Labs CIO Justin Hectus, “You can attack pieces of the contract lifecycle faster and in a much more satisfying way with a workflow tool than you can with a traditional end-to-end contract management system.“ Hectus notes that some of his clients have done that. But the go-forward, stop-the-bleeding problem is very different than the retrospective contract intelligence problem.
Hectus continues, “Contracts are the lifeblood of the company, and extracting insights from the historical contracts doesn’t come from workflow. It’s a wholly different concept in application than workflow.”
Not only does each stage require different tech, but there are also multiple kinds of tech within certain stages. For example, in order to analyze an executed agreement to answer a particular question, you have to be able to find the agreement (solved by a repository to store the agreements) and identify the clauses in question (solved by machine-learning analysis). But, while contract repository and machine learning both improve CLM, they are entirely different technologies. In the pre-execution review space, we have Lexcheck and TermScout, but even they are entirely different technologies.
Under our definition of CLM, there is no such thing as a “CLM tool.” Instead, there are multiple tools that can improve the different stages of CLM. Because of this complexity, we are careful to use the term “contract tech” rather than CLM, because only by stitching together multiple contract technologies could someone create an end-to-end technology solution for the entire CLM.
Some companies, both legal tech incumbents and big tech companies are already trying to own the entire CLM toolkit. Alvin Tedjamulia, the CTO of NetDocuments, argues that contract management must start with document management. “Contracts are documents,” says Tedjamulia, “and as such, are under the same obligation as any other documents. But contracts are probably the most important documents that exist in a corporate legal department. And the thought of having contracts being managed by any other type of services that is not the single source of truth, is just mind-boggling.”
Owning the entire lifecycle will not be simple because CLM itself is made up of so many different processes, which is why we are seeing acquisitions. But the multiplicity of functions involved or adjacent to contracts also means a motley crew of potential buyers and investors. Inside legal, investors, and strategic buyers in contract tech companies include players in eDiscovery, workflow, law firms, and transaction tech.
- Onit is a workflow tool that offers an end-to-end CLM solution through the acquisition of companies like McCarthy Finch, an ML-based review technology. Explaining the thinking behind the acquisition, Onit’s Elfman explains, “Workflow is great, AI is great, but the two need to be married.” See News Release, Nov. 27, 2020.
- Wilson Sonsini invested in Lexion (post-execution review). See Sara Merkin, “Lexion AI Based Contracts Venture Backed by Wilson Sonsini raises $11 Miln,” Reuters, June 16, 2021.
- eDiscovery platform Relativity invested in Heretik. See also Robert Ambrogi, “Investment In Relativity Puts the E-Discovery Company’s Valuation At Reported $3.6 Billion,” Lawsites, Mar 19, 2021 (“Relativity is not only the clear leader in software for the legal sector, but also an increasingly strategic company in enterprise technology generally, as proliferating data across multiple formats both on-premise and in the cloud need to be collected and analyzed for a wide range of compliance purposes.”)
- Outside legal, Docusign (execution) bought SpringCM (pre-execution authoring), Seal Software (post-execution review), and invested in Blackboiler (pre-execution review).
- Earlier this week, Conga, a pre-execution authoring tool that has an investment from Salesforce (Salesforce also invested in Ironclad), announced the acquisition of ContractWrangler, a post-execution review tool. See News Release, Aug 17 2021.
Other companies are staying in their lane and betting on the commoditization of other CLM functions. Some of the workflow-first companies are betting that companies like Google, Amazon, and IBM’s open-sourcing of machine-learning models will make it easier to build post-execution review tools. See Richard Tromans, “Why Google Cloud AI is a Game Changer for Ironclad,” Artificial Lawyer, June 10, 2021. Anticipating this trend, Heretik has been developing a connector that allows customers to use the Heretik workflows in conjunction with other machine learning models.
But contract tech commoditization goes in both directions. In contrast, per his tweet below, NewLaw innovator Alex Hamilton appears to believe that today’s general workflow tools could handle most of the requirements of pre-execution drafting requirements.
Finally putting a contract management system in place (cobblers' childrens' shoes).
It took 15m to build a passable one in Airtable (cost $240 a user a year for pro and once you have it, everything in your biz looks like a DB problem).
Remind me why legaltech is a category?
— Alex Hamilton (@AlexHamiltonRad) February 21, 2021
Finally, workflow is on fire. Workflow platform Monday.com has more than doubled its market cap to over $15B since going public in June. See Jeffry Kronenberg, “Software firm monday.com stock soars to post-IPO record high, up 130% in some two months,” Seeking Alpha, Aug 18, 2021. It is not hard to imagine a world in which Monday.com, Asana, Airtable, or the Microsoft Power Platform are serving as the workflow portion of an end-to-end CLM solution.
Contract tech is moving to the front
Law firms, alternative legal service providers, and law departments were the early adopters of contract technology, particularly post-execution analysis, for large-scale event-based reviews like M&A due diligence or LIBOR repapering. The team at Gravity Stack, for example, was being noted for incorporating ML into contract review as early as 2016. See, e.g., Perry Marchant, “Spotlight on Reed Smith: an eDiscovery Approach to M&A Due Diligence,” Relativity Blog, Nov 4, 2016.
The appetite for contract tech is moving from professional services to the business. According to the Association of Corporate Counsel’s 2021 CLO survey, 67% of departments looking to invest in new tech are looking to invest in contract management technology. See ACC “2021 CLO Report,” at 48. Companies of all sizes are being targeted. Juro (pre-execution workflow) and Lexion (post-execution review) have both built affordable, light touch products for startups and SMBs who do not need an integration-rich product.
While corporate legal departments have been encouraged by the business to adopt a front-end solution to more quickly draft and execute their contracts, they are now paying more attention to managing their executed contracts. A survey conducted by Deloitte and the World Commerce & Contracting (“WCC”) revealed that 39% of respondents said their organization is working to improve post-execution processes and 34% are implementing more robust obligation management. See When Technology Meets Humanity: The Future of Contract Management, Feb 2021, at 8. Similarly, a 2020 study by the same group suggested that 70% of the time and cost on contracts occurred during the performance of the contract. See id (citing WCC, “Better Contracts. Faster Contracts. Eliminating the Friction Points in Contracting,” Dec 2020).
A good example of this trend is Kira Systems, one of the early pioneers of machine-learning contract review inside law firms, spinning off at a new start-up called Zuva to go after the corporate market. See Richard Tromans, “Litera Buys Kira, Noah Waisberg Creates New Company Zuva,” Aug 10, 2021. Likewise, the rapid growth of Evisort and LinkSquares—as noted above, both big parts of the Q1-2 ’21 legal tech investment wave—suggests that the driver of contract tech is strategic value to the business rather than a search for efficiency by lawyers working in the legal department.
Humans combined with tech is increasing adoption
Several of the early market leaders in contract ML are offering a combination of technology deployment with dedicated experts and they are not even hiding it.
Nik Reed, SVP Product, R&D and Design at Knowable and one of the co-founders of Ravel Law, says that the accuracy of the technology must “start at 98% if it is going to be used for decision making,” which is simply unachievable without humans in the mix. Robin.ai CEO Richard Robinson credits his company’s traction with their business model AI+ which means AI and their team of experts quickly reviewing and redlining documents pre-execution. See Richard Tromans, “New AI+’ Service for GCs Via the Law Boutique & Robin AI,” Artificial Lawyer, Apr 27, 2020.
The power of combining humans and technology is the driving force behind the partnership between Gravity Stack (a technology-first human business) and Heretik (a pure software company). Heretik’s development road map is unique in that they have placed more emphasis on empowering rather than replacing reviewers, which makes sense given the team’s roots inside Relativity, a tool that specializes in empowering human review and legal decision making. See Andreas Rekdal, “Heretik scoops up $2.4M for data-driven document review software,” Built in Chicago, Dec 17, 2017 (discussing origins with Relativity).
Disclosure: Bryon Bratcher is Managing Director of Gravity Stack; and Gravity Stack is a client of Killer Whale Strategies, a consulting company owned by Zach Abramowitz.
Heretik CEO Charlie Connor notes, “While Heretik’s functionality can certainly find and identify sections and clauses, the bigger vision of the user experience is not to extract data from a contract without ever having to open the agreement, but to make it exponentially easier for the reviewer to find and interpret what they need inside that agreement.”
We suspect that not only do human + tech solutions offer the best product, but also fits the purchasing habits of big corporate legal departments.
Trullion CEO Isaac Heller’s explanation for why his company is selling contract review ML to the office of the CFO rather than legal fits this narrative as well. “We get lawyers reaching out all the time to ask if they can use Trullion,” says Heller, “but right now we are focusing on CFOs and controllers. Contract tech for legal is still open-ended: you find data you need but you still have open-ended judgment. Is there any precedent? What do I have to do? Is there anything I can compare it to? It is harder to scale heterogeneous needs.”
For all these reasons, humans + tech have better product-market-fit in legal.
CLM’s relationship with the rest of the business
CLM, which itself is made up of smaller processes, is actually a small part of bigger processes like sales, procurement, marketing, and HR. Indeed, that is the core point of our lead graphic.
In order for the business to be operating efficiently, CLM must keep pace. As a result, contract tech will often be one feature in business software such as procurement tools like SAP Ariba or Coupa, real estate management software like MRI and Yardi, or even specialized business management tools for SMBs like Honeybook. See Post 220 (Jae Um discussing Honeybook and other companies and noting that “Legal is part of the show but not the star”).
Simply stated, there is nothing legal about these companies nor are they typically purchased by lawyers inside legal departments or anywhere else. Thus, many companies that are evaluating, purchasing, and implementing contract tech are doing so at the direction of procurement and/or sales, not legal. It is not coincidence that the product dropdown on Agiloft’s website lists procurement and sales before legal. “The domain of the contract is not just the domain of the lawyers,” says Agiloft CEO, Eric Laughlin. Richard Tromans, “Who Will Win the CLM Game of Thrones” March 30, 2021.
Bernadette Bulacan Starin, VP Lead Global Evangelist at Icertis is adamant that, while the legal department should be one of the key stakeholders in the decision-making process, contract tech is far more than legal tech because it serves so many more stakeholders across an enterprise. Bulacan Starin observes:
Contracts are first relationships nurtured and managed by procurement or a sales team. We recognize that the contract process begins before a request to draft or review hits the legal department and continues after an executed contract is filed away. To meet the speed of business, not every contract is touched by legal, or can be touched by legal nor should be touched by legal. Contracting is a team sport, and the contract tools need to be inclusive and robust for everyone involved, not just for the legal team.
Bulacan Starin’s view is notable considering her background as both a former law firm partner and legal tech veteran at Thomson Reuters. It is also worth noting that Icertis’ case study with Daimler, for example, features members of the procurement team managing compliance in the supply chain, not the legal department. See “Daimler Spearheads Digital Transformation of Contracting and Sourcing Process with Icertis,” Icertis Case Study.
Better CLM is powerful, not just for legal
The increased appetite for contract tech is due, at least partially, to a strong conviction in the power of more efficient CLM, a point made in an earlier Legal Evolution post that quantified poor contract practices and processes as a $2.5 trillion problem. See Post 228 (author by Bill Mooz and WCC executive Paula Doyle).
Better contracting is not just a mechanism to save time inside the legal department. Reducing transactional frictions often caused by the legal department can achieve better results for the business. As an example, Daimler’s implementation of Icertis reduced contract cycle time from six weeks to one week. thus streamlining access to 500,000 suppliers and 6,000 buyers.
Likewise, Radiant Law, whose founder Alex Hamilton eschews most of contract tech altogether, aims to shorten the contract turnaround time from weeks and months to a single day. See Alex Hamilton, “A Different Road,” LinkedIn, July 1, 2021 (citing the stunning progress of this vertically integrated law firm); cf Post 241 (Hamilton claiming that this level of progress requires a greenfield law firm, as legacy BigLaw partners cannot tolerate the imperative standardization).
A third example is Loreal, which was able to make a business decision to double down on working with high volumes of brand ambassadors, in part because they used Ironclad to streamline the process of contracting with social influencers. See “How L’Oréal Accelerates Brand Ambassador Agreements with Ironclad,” Ironclad Case Study.
Increased tech budgets inside legal departments and multiple buyers of contract tech inside the organization are what has some of the top names in VC like Accel, Sequoia, Greycroft, and Y Combinator investing in contract tech companies. Aleph, one of the top Israel-based VCs, has invested in both Trullion (contract tech focused on enterprise accounting) and Lawgeex (contract tech focused on contract review). Likewise, Tiger Global, a renowned NYC-based unicorn hunter, has invested in SirionLabs (contracting platform) and Contractbook (another contracting platform). As one venture capitalist with a contract tech portfolio company told us, “All they (the portfolio) have to do is not go out of business, and one of the tech giants will acquire them.”
If legal were the only buyer, it is doubtful that contract tech would be experiencing such a boom. As the examples in this post suggest, something larger is at work.
Is contract tech part of legal tech, or something bigger?
We began with a definition of CLM and contract tech, we end with a definition of another subjective term “legal tech,” which we define as technology purchased by lawyers to replace or augment work previously done by lawyers.
Under this definition, contract tech may not fall under the category of legal tech. This is not merely semantics and the outcome of this issue could be a major point of inflection for legal technology in general. While legal departments may be the custodians of a company’s contracts, legal departments are not usually at the top of the technology budget totem pole, which is why the contract tech companies are targeting sales and procurement teams detailed above. But, in the same way that there has not been a clear winner in contract tech, there is not a clear winner in terms of which departments should lead the CLM transformation: sales, procurement, accounting, or legal.
If legal departments are able to help companies improve their company’s CLM, the precedent will be set for the legal departments adding value to the core business and likely justify further technology initiatives. If they miss the opportunity to lead, they will likely be at the mercy of other departments and continue to stand last in line for technology investment.